It sometimes seems that Chinaâs roller-coaster stock markets can defy gravity for ever. Prices on the two stock exchanges in the Middle Kingdom have soared to levels that confound logic, yet this has not dampened investor sentiment even though there have been a couple of sharp corrections.

In the first 14 trading days of this year, volume on the Shanghai exchange, the bigger of the two, reached 1.2 trillion yuan ($150bn), which compares with 1.9 trillion yuan for 2005 and is more than one fifth of trading for last year.

The markets rose by about 130% last year and produced price to earnings ratios in triple digits – which is a sight better than the ratios of the dotcom boom, when there was no “e” to be found among p/e ratios – but the quality of Chinese company earnings often raises questions.

And in case anyone doubts the casino-like atmosphere of China’s stock markets they might like to consider that last year the country overtook Hong Kong in having the world’s most active warrants market: turnover in the two Chinese markets rose tenfold last year to well over $240bn. Although some fantasists see this as an indication of growing sophistication in Chinese equities, the reality is warrant trading has little to do with traditional hedging of investments and a great deal to do with sheer speculation.

But there is a reality check to be made and it can be seen every day by comparing the prices of stocks with a dual listing in China and on the Hong Kong exchange. The Hong Kong prices are markedly lower than those on the Chinese exchanges. This appears to provide a classic arbitrage opportunity but, alas, this too is a mirage.

The difference in price occurs between A shares, which only Chinese citizens can buy and H shares listed in Hong Kong, which anyone can buy and would be bought in vastly greater numbers if Chinese citizens were allowed free access to foreign exchanges and had the means to convert their ever-strengthening currency into other currencies.

In short, prices are higher in China by virtue of supply and demand for stocks that has nothing to do with the underlying values of the companies that are traded. In a nation awash with liquidity, giving investors little choice of investment vehicles, those that exist are traded with a fervour that makes the Chinese fad for Starbucks coffee appear mundane.

Yet there is a taboo on the use of the word bubble to describe what is happening in Chinese markets. Invited to describe the situation in the country as the emergence of a bubble, Ronald Arculli, the ultra-diplomatic chairman of the Hong Kong stock exchange, noted that “the lack of variety in investment tools has contributed to the vast sums of money that have accumulated in Chinese stocks”.

Others, notably those outside China, have been less reticent in calling a bubble. Jim Rogers, the fund manager who gained kudos for correctly calling the rise in commodity markets, has declared a bubble is in the making and advised investors to stay away. Rogers is teaching his daughter Mandarin as the language of the future and regularly talks about moving to China but perhaps will think again about sinking too many of his assets there.

Although the official line in China is that everything is rosy, Rogers’ warning seems to be more persuasive than the enthusiasm of some Hong Kong-based fund managers who continue to believe the sky is the limit for Chinese stocks. Behind the scenes, regulators are thinking carefully about introducing market dampening measures but they are often slow to act, maybe disastrously so in this case.